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An Economic Model of Consensus on Distributed Ledgers

Author

Listed:
  • Halaburda, Hanna

    (New York U)

  • He, Zhiguo

    (U of Chicago)

  • Li, Jiasun

    (George Mason U)

Abstract

The designs of many new blockchains are inspired by the Byzantine fault tolerance (BFT) problem. While traditional BFT protocols assume most system nodes behave honestly, we recognize that blockchains are deployed in environments where nodes are subject to strategic incentives. This paper thus develops an economic framework for analyzing distributed consensus formation with explicit incentive considerations. We formalize the consensus formation process in a dynamic game with imperfect information and preplay communication where non-Byzantine nodes are Knightian uncertain about Byzantine actions, and characterize all of its symmetric equilibria. Our findings enrich those from traditional BFT algorithms, offer guidance for designing blockchains in trustless environments, and also provide a theoretical framework bridging distributed consensus and game theoretical modeling.

Suggested Citation

  • Halaburda, Hanna & He, Zhiguo & Li, Jiasun, 2023. "An Economic Model of Consensus on Distributed Ledgers," Research Papers 4137, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:4137
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    File URL: https://www.gsb.stanford.edu/faculty-research/working-papers/economic-model-consensus-distributed-ledgers
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    Cited by:

    1. Joshua S. Gans & Hanna Halaburda, 2023. ""Zero Cost'' Majority Attacks on Permissionless Blockchains," NBER Working Papers 31473, National Bureau of Economic Research, Inc.
    2. Joshua S. Gans, 2023. "Cryptic Regulation of Crypto-Tokens," NBER Chapters, in: Entrepreneurship and Innovation Policy and the Economy, volume 3, pages 139-163, National Bureau of Economic Research, Inc.
    3. Joshua S. Gans & Richard T. Holden, 2022. "Mechanism Design Approaches to Blockchain Consensus," NBER Working Papers 30189, National Bureau of Economic Research, Inc.
    4. Luyao Zhang & Xinyu Tian, 2022. "On Blockchain We Cooperate: An Evolutionary Game Perspective," Papers 2212.05357, arXiv.org, revised Jan 2023.
    5. Igor Makarov & Antoinette Schoar, 2022. "Cryptocurrencies and Decentralised Finance," BIS Working Papers 1061, Bank for International Settlements.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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